INDUSTRY NOTE USA | Themes & Tactics US Insights January 31, 2018 US Insights Finding Fresh Arms in the Bottom of the 12th; Stocks That Can Still Work EQUITY RESEARCH AMERICAS Key Takeaway Amazingly, nine years into this expansion, economic growth seems to be strengthening. Still, with S&P operating margins close to all-time highs, 2017 having the best EPS growth rate since 2011, and 2018 growth expected to exceed 2017's, we believe there is appetite for analyst top picks which also have accelerating EPS growth from other than just tax, outsized op. margin expansion, were '17 laggards, or all three. Most Jefferies analysts published their 2018 outlooks in the last several weeks and while you may not be surprised to see some mega cap tech names among the top picks, there were also a number of less obvious, less well performing, turnaround-type stocks that ascended the ranks. Starting with the stocks that Jefferies analysts had recently listed as top picks for 2018, we looked for stocks with 2018 estimated earnings growth acceleration, 2018 expected margin expansion that's better than the respective sector, and 2017 underperformance vs. the sector. We weren't so rigid to require every name meet every one of the criteria--ultimately whether a name was included had much to do with analyst conviction levels and prospects for improvement. All of the selected stocks have one thing in common as far as Jefferies analysts are concerned--operationally, things can get better from here. Some have seen recent improvements, some have seen recent setbacks, but in all cases, there is a path to greater things driven by factors other than just tax. The improvement generally comes from one of several drivers, and we offer those below, along with the stocks that fit into each. Some stocks fit into more than one category, and in those cases we've listed them more than once. Also, though we tried to include all the stocks that made sense, since this was not as simple as just a screen, arguments could certainly be made for other stocks--it would be impossible to say that a piece like this is exhaustive. Underappreciated revenue opportunity. CELG, GLNG, GT, HAE, HOLX, KSS, MLM, PAGP, PX, SBGI, STLD, TXT, UAA, ULTA Accelerating cash flow/earnings growth. BIO, BLD, CASY, CJ, CVX, EXPE, FM CN, KMT, MCK, OMF, SBNY, SC, SYNH, TXN, UTX, WEX, WMB M&A. CASY, SC Cost savings. BLD, ERI, KMT Allocation of capital. GPS, OMF Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 19 to 23 of this report. Jefferies Equity Research * Equity Analyst (888) JEFFERIES [email protected]Laurence Alexander, CFA * Equity Analyst (212) 284-2553 [email protected]Brandon Couillard * Equity Analyst (212) 284-2462 [email protected]Raj Denhoy * Equity Analyst (212) 336-7070 [email protected]Ramsey El-Assal * Equity Analyst (212) 284-4649 [email protected]Jason Gammel § Equity Analyst +44 (0) 20 7029 8709 [email protected]Randy Giveans * Equity Analyst (713) 651-3829 [email protected]Casey Haire * Equity Analyst (212) 707-6418 [email protected]Brad Handler * Equity Analyst (212) 336-7249 [email protected]John Hecht * Equity Analyst 415-229-1569 [email protected]John Janedis, CFA * Equity Analyst (212) 284-2187 [email protected]Sheila Kahyaoglu * Equity Analyst (212) 336-7216 [email protected]David Katz * Equity Analyst (212) 323-3355 [email protected]Randal J. Konik * Equity Analyst (212) 708-2719 [email protected]Ashik Kurian § Equity Analyst +44 (0)20 7029 8785 [email protected]Christopher LaFemina, CFA * Equity Analyst (212) 336-7304 [email protected]Mark Lipacis * Equity Analyst (415) 229-1438 [email protected]Christopher Mandeville, CFA * Equity Analyst (646) 805-5407 [email protected]Philip Ng, CFA * Equity Analyst (212) 336-7369 [email protected]Anthony Petrone, CFA * Equity Analyst (212) 708-2703 [email protected]Seth Rosenfeld, CFA § Equity Analyst +44 (0) 20 7029 8772 [email protected]Christopher Sighinolfi, CFA * Equity Analyst (212) 707-6420 [email protected]Brian Tanquilut * Equity Analyst (615) 963-8338 [email protected]Brent Thill * Equity Analyst (415) 229-1559 [email protected]Stephen Volkmann, CFA * Equity Analyst (212) 284-2031 [email protected]David Windley, CFA, CPA * Equity Analyst (615) 963-8313 [email protected]Stephanie Wissink * Equity Analyst (212) 284-1713 [email protected]Michael J. Yee * Equity Analyst (415) 229-1535 [email protected]* Jefferies LLC § Jefferies International Limited ^Prior trading day's closing price unless otherwise noted.
Transcript
INDUSTRY NOTE
USA | Themes & Tactics
US Insights January 31, 2018
US InsightsFinding Fresh Arms in the Bottom of the12th; Stocks That Can Still Work
Key TakeawayAmazingly, nine years into this expansion, economic growth seems to bestrengthening. Still, with S&P operating margins close to all-time highs, 2017having the best EPS growth rate since 2011, and 2018 growth expected toexceed 2017's, we believe there is appetite for analyst top picks which alsohave accelerating EPS growth from other than just tax, outsized op. marginexpansion, were '17 laggards, or all three.
Most Jefferies analysts published their 2018 outlooks in the last several weeksand while you may not be surprised to see some mega cap tech names amongthe top picks, there were also a number of less obvious, less well performing,turnaround-type stocks that ascended the ranks. Starting with the stocks thatJefferies analysts had recently listed as top picks for 2018, we looked for stocks with 2018estimated earnings growth acceleration, 2018 expected margin expansion that's better thanthe respective sector, and 2017 underperformance vs. the sector. We weren't so rigid torequire every name meet every one of the criteria--ultimately whether a name was includedhad much to do with analyst conviction levels and prospects for improvement.
All of the selected stocks have one thing in common as far as Jefferies analystsare concerned--operationally, things can get better from here. Some have seenrecent improvements, some have seen recent setbacks, but in all cases, there is a path togreater things driven by factors other than just tax. The improvement generally comes fromone of several drivers, and we offer those below, along with the stocks that fit into each.Some stocks fit into more than one category, and in those cases we've listed them morethan once. Also, though we tried to include all the stocks that made sense, since this wasnot as simple as just a screen, arguments could certainly be made for other stocks--it wouldbe impossible to say that a piece like this is exhaustive.
Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 19 to 23 of this report.
page 18 of 23 , Equity Analyst, (888) JEFFERIES, [email protected] Equity Research
Please see important disclosure information on pages 19 - 23 of this report.
Analyst Certification:I, Jefferies Equity Research, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, Laurence Alexander, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, Brandon Couillard, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Raj Denhoy, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Ramsey El-Assal, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Jason Gammel, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Randy Giveans, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Casey Haire, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Brad Handler, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, John Hecht, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, John Janedis, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Sheila Kahyaoglu, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, David Katz, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Randal J. Konik, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Ashik Kurian, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Christopher LaFemina, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, Mark Lipacis, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Christopher Mandeville, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, Philip Ng, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Anthony Petrone, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, Seth Rosenfeld, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.
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page 19 of 23 , Equity Analyst, (888) JEFFERIES, [email protected] Equity Research
Please see important disclosure information on pages 19 - 23 of this report.
I, Christopher Sighinolfi, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, Brian Tanquilut, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Brent Thill, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Stephen Volkmann, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, David Windley, CFA, CPA, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, Stephanie Wissink, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Michael J. Yee, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.Registration of non-US analysts: Ashik Kurian is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the FINRA Rule 2241 and restrictions on communications with a subject company, public appearances and trading securities heldby a research analyst.As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in this report receivescompensation based in part on the overall performance of the firm, including investment banking income. We seek to update our research asappropriate, but various regulations may prevent us from doing so. Aside from certain industry reports published on a periodic basis, the large majorityof reports are published at irregular intervals as appropriate in the analyst's judgement.
Company Specific DisclosuresFor Important Disclosure information on companies recommended in this report, please visit our website at https://javatar.bluematrix.com/sellside/Disclosures.action or call 212.284.2300.
Explanation of Jefferies RatingsBuy - Describes securities that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period.Hold - Describes securities that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within a 12-month period.Underperform - Describes securities that we expect to provide a total return (price appreciation plus yield) of minus 10% or less within a 12-monthperiod.The expected total return (price appreciation plus yield) for Buy rated securities with an average security price consistently below $10 is 20% or morewithin a 12-month period as these companies are typically more volatile than the overall stock market. For Hold rated securities with an averagesecurity price consistently below $10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. ForUnderperform rated securities with an average security price consistently below $10, the expected total return (price appreciation plus yield) is minus20% or less within a 12-month period.NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/or Jefferies policies.CS - Coverage Suspended. Jefferies has suspended coverage of this company.NC - Not covered. Jefferies does not cover this company.Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy or applicable securitiesregulations prohibit certain types of communications, including investment recommendations.Monitor - Describes securities whose company fundamentals and financials are being monitored, and for which no financial projections or opinionson the investment merits of the company are provided.
Valuation MethodologyJefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and expected totalreturn over the next 12 months. The price targets are based on several methodologies, which may include, but are not restricted to, analyses of marketrisk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF,P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value, dividend returns,and return on equity (ROE) over the next 12 months.
Jefferies Franchise PicksJefferies Franchise Picks include stock selections from among the best stock ideas from our equity analysts over a 12 month period. Stock selectionis based on fundamental analysis and may take into account other factors such as analyst conviction, differentiated analysis, a favorable risk/reward
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page 20 of 23 , Equity Analyst, (888) JEFFERIES, [email protected] Equity Research
Please see important disclosure information on pages 19 - 23 of this report.
ratio and investment themes that Jefferies analysts are recommending. Jefferies Franchise Picks will include only Buy rated stocks and the numbercan vary depending on analyst recommendations for inclusion. Stocks will be added as new opportunities arise and removed when the reason forinclusion changes, the stock has met its desired return, if it is no longer rated Buy and/or if it triggers a stop loss. Stocks having 120 day volatility inthe bottom quartile of S&P stocks will continue to have a 15% stop loss, and the remainder will have a 20% stop. Franchise Picks are not intendedto represent a recommended portfolio of stocks and is not sector based, but we may note where we believe a Pick falls within an investment stylesuch as growth or value.
Risks which may impede the achievement of our Price TargetThis report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, thefinancial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions basedupon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance ofthe financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, andincome from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financialand political factors. If a financial instrument is denominated in a currency other than the investor's home currency, a change in exchange rates mayadversely affect the price of, value of, or income derived from the financial instrument described in this report. In addition, investors in securities suchas ADRs, whose values are affected by the currency of the underlying security, effectively assume currency risk.
Other Companies Mentioned in This Report• Bio-Rad Laboratories (BIO: $263.41, BUY)• C&J Energy Services, Inc. (CJ: $31.81, BUY)• Casey’s General Stores, Inc. (CASY: $124.25, BUY)• Celgene Corporation (CELG: $103.26, BUY)• Chevron (CVX: $128.48, BUY)• Eldorado Resorts Inc (ERI: $32.00, BUY)• Expedia, Inc (EXPE: $130.40, BUY)• First Quantum (FM CN: C$18.50, BUY)• Golar LNG Limited (GLNG: $28.27, BUY)• Goodyear Tire & Rubber Co/The (GT: $35.66, BUY)• Haemonetics Corporation (HAE: $65.92, BUY)• Hologic, Inc. (HOLX: $43.75, BUY)• Kennametal Inc. (KMT: $49.57, BUY)• Kohl's Corporation (KSS: $67.95, BUY)• Martin Marietta Materials (MLM: $236.91, BUY)• McKesson Corporation (MCK: $176.33, BUY)• OneMain Holdings, Inc. (OMF: $33.48, BUY)• Plains GP Holdings, L.P. (PAGP: $22.23, BUY)• Praxair (PX: $162.83, BUY)• Santander Consumer USA Holdings (SC: $18.62, BUY)• Signature Bank (SBNY: $154.20, BUY)• Sinclair Broadcast Group (SBGI: $38.85, BUY)• Steel Dynamics, Inc. (STLD: $47.32, BUY)• Syneos Health (SYNH: $40.75, BUY)• Texas Instruments Incorporated (TXN: $112.65, BUY)• Textron Inc. (TXT: $61.22, BUY)• The Gap, Inc. (GPS: $35.08, BUY)• The Williams Companies, Inc. (WMB: $31.98, BUY)• TopBuild Corp. (BLD: $76.36, BUY)• Ulta Beauty (ULTA: $229.15, BUY)• Under Armour (UAA: $14.53, BUY)• United Technologies Corp. (UTX: $136.67, BUY)• WEX, Inc. (WEX: $156.00, BUY)
For Important Disclosure information on companies recommended in this report, please visit our website at https://javatar.bluematrix.com/sellside/Disclosures.action or call 212.284.2300.
Distribution of RatingsIB Serv./Past 12 Mos. JIL Mkt Serv./Past 12
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page 22 of 23 , Equity Analyst, (888) JEFFERIES, [email protected] Equity Research
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